Three factors go into the calculation of your workers’ compensation (WC) premium:
- The rate assigned to each payroll classification in your business,
- The total amount of your payroll for each classification,
- And your experience modification factor.
Your workers’ compensation premium is calculated using the formula
payroll classification X $100 of payroll X experience modification factor = premium
As an employer, only one of the three factors can be controlled and reduced without a reduction of your staffing levels: the experience modification factor, often referred to as the “mod.”
- The amount of risk assigned to each payroll classification is calculated by the National Council on Compensation Insurance (NCCI,) or by your state department of insurance, as applicable.
- The amount of payroll is a variable in the premium calculations but the wise employer will staff as needed as the WC premiums should not be the determining factor in your employment of someone.
The question then becomes “How can we lower our mod?”
- First you must understand the mod is a numeric representation of the claim history of your business. It represents the last three years of claim payments made on your behalf.
- The mod assigned to your business job classifications is a comparison of your claims record to that of all other employers in your state with the same job classification code(s).
If your claim history and claim payments are higher than average, your mod will be higher than the average (1.00) and your work comp premium will be higher than average.
Conversely, if your claim payments and claim history is better than average, your mod will be lower than average and your work comp premium will be lower than average.
Here are some examples of how this works when your claims history for a job classification code is twenty percent better and when it is twenty percent worse than other employers in your state with the same job classification codes.
The smart employer will utilize one of several proven methods to reduce the mod. These include:
- Implement a return to work program
- Establish and enforce a strong safety program
- Never use uninsured subcontractors
- Review your job classifications to verify that every employee is properly classified
- Become part of a group rating
Let’s discuss these ways of lowering your mod.
A Return to Work Program:
A properly designed return to work program will have a major impact on your workers’ compensation cost.
When an injured worker returns to light duty or modified duty work, the cost of the WC claim can be greatly reduced.
For example, an injured worker hurts his back, and the employee’s supervisor decides not to be bothered with an employee on light duty, and refuses to take the employee back.
- The injured workers comp rate is $500 per week
- It will take 20 weeks for the employee to fully recover from the injury.
- The employee’s supervisor makes the decision that he does not want to be bothered with having an employee on light duty and refuses to take the employee back.
- The employee will receive $10,000 ($500 x 20) in indemnity benefits
- The total amount of the claim will be included in the mod calculations for the next three premium years.
If the Risk Manager has established a mandatory return to work program, the supervisor would:
- Bring the employee back to work on light or modified duty during his medical recovery.
- Save the company $10,000 that would have been paid in indemnity benefits.
Also, while the injured employee may not be contributing his full production capability, the employee still produces some value to the company.
However, the biggest impacts of the return to work program are:
- The claim history is $10,000 lower
- The lower claim payments will be utilized in the calculation of the mod for the next three premium years.
A Strong Safety Program:
A safe worksite is key to reducing your mod. A strong safety program will result in fewer accidents and fewer injuries.
- With fewer injuries, the claim payment history will be lower.
- The lower the claim payment history, the lower the mod and the lower the work comp insurance premium will be.
If your safety program is not top-notch, please contact us in regards to our safety kit. You can also hire safety consultants who are trained to identify safety hazards. Implement the safety changes that are recommended and mandate safety training for all employees.
Never Use Uninsured Subcontractors:
Failure to confirm proper WC insurance coverage is a common mistake made by employers when they hire subcontractors, especially in the construction fields. The use of self-insured subcontractors with their own WC coverage is important to the control of your mod because:
- Subcontractors will be covered by your WC insurance if they do not have their own coverage and are injured while working for you.
- This will increase the premium your company will owe at the year-end premium audit.
- It will increase your company’s mod for the next three policy years.
It is well worth the effort to document the WC coverage of every subcontractor your company hires.
Review Your Job Classifications:
If your clerical person (or lazy insurance broker) thought it would be easier to classify all your employees as warehouse workers, rather than to take time to properly classify every employee, your workers’ comp premiums and your mod are all out of whack.
- The overall loss experience of your company compared to the claim history of warehouse workers in general could result in a mod factor lower or higher than it should be.
- A careful review of each employee’s classification type could result in significant savings to your company (or an increase in your premiums, but you avoid committing fraud by declassifying your employees).
Become a Part of a Group Rating:
Many insurers will offer group discounts to recognized groups. The effect of the group discounts on your mod is due to most rating groups will not accept your company if your loss experience is higher than average.
- Normally new companies are not allowed into a group rating as three years of loss experience is needed to calculate the mod.
- Before joining a group for the benefit of the group mod, be sure the group mod is lower than the mod your company has on its own.
Does every company have an experience mod?
Like everything else in work comp, it varies by state. If the employer is pure self-insurance with no excess carrier and no large deductible, there is no need for an e-mod. But, many states impose premium tax on self insureds just like they do on regular insurance companies so the self insured still has to track and report their loss and loss ratio. If the employer is self insured up to a high deductible, the excess carrier will still report the loss information to NCCI and an e-mod is calculated for the self insured employer.
What is collateral and why is it required?
Often the states will require a surety bond or letter of credit from the self insured employer to guarantee payment of the claims. Also, the state will require the self insured employer to set aside what the state calculates as the needed collateral.
- The only real way to lower your workers’ compensation premium is to lower your experience modification factor, or mod.
- The best ways to lower your mod include:
- A mandatory return to work program in place
- A strong safety program
- Never use uninsured subcontractors
- Verify that your classification codes are correct
- Join a group rating when it is beneficial to do so
Next Topic: Who are the Players?
ESSENTIAL: This article is Return-to-Work Essentials content.